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Director’s duties not breached after contractor remains unpaid

In DHC Assets Limited v Antony Ivo Arnerich [2017] NZHC 1460 the High Court recently considered whether conduct by the director of Vaco Investments – in handling proceeds of sale and retention money – constituted a breach of his director’s duties, when DHC Assets Limited (a contractor to Vaco) remained an outstanding creditor.

DHC had undertaken significant building works for Vaco. Following completion, Vaco sold the property and paid all of its remaining assets to the family trust of its director Mr Arnerich. At the time, Vaco had received DHC’s final account for $553,095. Vaco subsequently went into liquidation.

Director’s Duties and Creditors

The Court considered whether Vaco owned (and sold) the property as trustee for the family trust, or whether it did so beneficially as Vaco Investments. If Vaco was acting as trustee, then the proceeds of sale would not be available to Vaco’s creditors. Alternatively, if Vaco owned the property beneficially, its duties to DHC could translate to the proceeds of sale.

The Court accepted that the family trust was set up with the intention of acquiring the land, and that Vaco held the land in its capacity as trustee. There was no evidence that Vaco had acknowledged liability under the building contract as a trustee. The Court did not grant the summary judgement as it considered Vaco had a reasonably arguable defence it was acting as a trustee.

Retentions

Contrary to the agreement between the parties, Mr Arnerich had prematurely received retention money from ANZ before the practical completion certificate was issued. Upon receiving the retention, Mr Arnerich had distributed it, together with Vaco’s remaining assets, to Vaco’s associated interests. Mr Arnerich contended that he had acted on the engineer’s certification that there was no money owing to DHC. However, a subsequent Adjudicator’s Determination confirmed that DHC was not paid what it was owed under the contract.

At issue was whether Mr Arnerich breached his obligations of good faith and to act in the best interests of the company. The Court did not consider that the Adjudicator’s Determination automatically resulted in a breach by Mr Arnerich. The Court was unwilling to accept that Mr Arnerich should have withheld the retentions pending a review of the engineer’s certificate, because he should be entitled to rely on the engineer’s word, especially when there was no express provision to the contrary.

It is likely the same outcome would be reached under the new trust regime for retentions. Under the new regime, any obligations Vaco owed as trustee would be discharged when the money ceased to be payable to DHC under the contract. Depending on the contract, it is likely an engineer’s instruction would have this effect.